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FAQ Page 2 - Question 22

Q: Do you get technical and mathematical with options or do you just trade the direction of the underlying market?

A: Ultimately for most private traders what will make or lose you money dealing options is your overall call on the market rather than how clever or how good an options expert you are. I would rather be an idiot who has a good feel for the market rather than a PhD in mathematics and option theory/pricing. Some might argue with that assertion but then I'd say 'I'm market-making options'.

I'm somewhat in between, having a reasonable view on the markets combined with a reasonable understanding of options and their theory.

I don't look at options purely from a mathematical standpoint but I do look and understand the different strategies that one can employ because buying options outright (as anyone's main use for options) is normally a one way trip to the poor house over time.

In my endeavour to try and figure out some reason to the madness of options I rely on my trusty piece of software called the Hoadley options spreadsheet. It is my theory that anything on the internet that is sold for money can also be found for free if a) you look hard enough and b) know where to look, and the Hoadley software is a case in point.

Go to www.hoadley.net and download it, the software plugs straight into Microsoft Excel. Also make sure you also take the online training slideshows because those are very helpful. For beginners this type of program can make your head spin but if you want to have a chance in options then you must use it or similar software.

The software will enable you to see how the option is priced, whether it is expensive or cheap and any strategy that you may well be thinking of implementing. It will also be able to estimate how the option price will play out over time and how much it will be worth if the underlying product moves or doesn't move etc.

A good options trader should always try and analyse what he's trying to achieve with options because when you look at them from a mathematical standpoint you can often see advantages/disadvantages that you can't see if just looking at the one dimensional options price.

Ultimately do not attempt options trading without having a very solid understanding of what they are and how they behave in different types of market scenarios. Finally take with a large grain of salt any article that you read in a paper or magazine on options unless written in some detail by a person who actually trades them. Journalists are notorious for writing ill-informed and useless copy on these complex financial instruments.